Risky business – informal administration of a construction contract

On 5 July 2018, the Supreme Court of New South Wales handed down its decision in the case of Southern Cross Electrical Engineering v Steve Magill Earthmoving [2018] NSWSC 1027.

The case concerned a summons filed by Southern Cross Electrical Engineering (Southern Cross) with the Supreme Court seeking a declaration that an adjudicator’s decision was void, or in the alternative, an order quashing that decision.

The Court provided some useful comments on practical aspects of adjudication.

WHAT THE CASE IS ABOUT

On 23 May 2017, Southern Cross and Steve Magill Earthmoving (Earthmoving) entered into a subcontract where Earthmoving was required to perform excavation and trenching works for “the Parkes Project”.

On 5 December 2017, Earthmoving served a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) for the sum of $470,000.00 (Payment Claim) – that sum included a claim for in excess of $387,000.00 for trenching and backfilling works.

The measurements were carried out by Arndell Surveying, other than the measurements for the “extra width trenches”, which were carried out by Mr Magill.

On 19 December 2017, Southern Cross served a payment schedule which disputed that any amount was owing to Earthmoving and asserted that the sum of $473,000.00 was owing to it by Earthmoving (Payment Schedule). Southern Cross stated in the Payment Schedule that:

Arndell Surveying had overstated the actual lengths by 646 lineal metres for the “HV Trenching” and 63 lineal metres for the “LV/DC Trenching”; and

in relation to the “extra width trenches”, Earthmoving had not complied with clause 12.9 of the contract which dealt with variations.

On 10 January 2018, Earthmoving lodged an adjudication application – in support of that application, Earthmoving provided a statutory declaration from Mr Magill which stated that the subcontract had been administered on an informal basis with respect to variations and outlined the manner in which the “extra width trenches” were calculated by Mr Magill;

In its adjudication response, Southern Cross elaborated on the requirement for strict compliance with the contract for variations and also stated that the methodology used by Earthmoving to measure the additional amount of excavation was “both unjustified and unreasonable”, however, that latter reason had not been raised in the Payment Schedule.

On 29 January 2018, the adjudicator determined that the sum of $400,158.00 inclusive of GST was owing by Southern Cross to Earthmoving (the Determination). In the Determination, the adjudicator:

Accepted Earthmoving’s calculations (carried out by Arndell Surveying) in relation to the lineal metres of work, excluding the “extra width trenches”;

Accepted Earthmoving’s calculations (carried out by Mr Magill) in relation to the “extra width trenches”;

Stated that Southern Cross had conceded in the Payment Schedule that a mechanism outside of the contract was used to agree to variations verbally on a previous occasion; and

Stated that Southern Cross had not convinced the adjudicator that no variation was agreed, or that Earthmoving had over-claimed for the work.

On 5 February 2018, Southern Cross filed a summons. The main ground relied upon by Southern Cross was that the adjudicator had wrongly imposed an onus on Southern Cross to prove that there had not been a variation of, or change to, the scope of works, and that work had been over-claimed by Earthmoving. Southern Cross also argued that the determination was “unreasonable”.

Earthmoving primarily argued that the adjudicator had not imposed an onus on Southern Cross, rather, the adjudicator simply preferred the evidence of Earthmoving on those issues.

Southern Cross did not ultimately challenge the measurements carried out by Arndell Surveying and the issue for determination before the Court was solely confined to the adjudicator’s reasons which dealt with the “extra width trenches”.

THE COURT’S DECISION

The Court determined in favour of Earthmoving. This was primarily because:

The Court stated that the proper reading of paragraphs 68 to 70 of the adjudicator’s decision is that there was no onus imposed on Southern Cross, but rather, the evidence provided by Southern Cross both as to the amount claimed for work and the requirement for strict compliance with the variation mechanisms in the contract had not “trumped” the evidence provided by Earthmoving;

Southern Cross had only raised in the Payment Schedule the issue of the accuracy of measurements – it had not raised the issue of the validity of the method used by Earthmoving to measure the number of metres that were claimed for the “extra width trenches” and it was therefore not entitled to do so in its adjudication response;

It was open to Southern Cross to address the method of measurement in the Payment Schedule, as that issue was apparent in the Payment Claim, but it had failed to do so; and

Factually, the adjudicator probably used the incorrect approach in calculating the “extra width trenches”, but he was given little assistance by the parties on the issue and therefore, the decision was not unreasonable to the extent to invalidate the determination.

WHAT TO TAKE AWAY

The decision provides useful guidance on the need for a respondent party (principal or head contractor) to include sufficiently detailed reasons for withholding payment in its payment schedule, to avoid the issue arising where the respondent party is not able to rely upon a subsequent argument in its adjudication response because that reason was not included in a payment schedule.

In addition, care needs to be taken particularly by a respondent party when a contract is informally administered, as this may lead to an argument by a claimant party (head contractor or subcontractor) that the requirement for strict compliance with certain terms of a contract have been waived by virtue of the conduct of the parties during the course of a project.

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